Chinese Government (Finally) Ups Action Plan to Combat Gray Market

The Prada store at Beijing's Shin Kong Place luxury mall. (Jing Daily)

The Prada store at Beijing’s Shin Kong Place luxury mall. (Jing Daily)

Thanks to China’s high import tariffs, the country’s rampant gray market has been giving foreign brands a headache for years. Now, a perfect storm of slowing retail growth, dramatic currency fluctuations, and Hong Kong unrest is finally causing enough trouble for the Chinese government that it’s starting to take increasingly significant measures against this partially underground economy.

This week, China’s State Council announced that it will be cutting tariffs on imported consumer goods, introducing more duty-free stores, and cracking down on the country’s online gray market in order to boost domestic consumption. Although details are sparse, a trial run of the tariff-slashing scheme is planned for July, and the cut for imported goods will be joined by a decrease in the current 30 percent consumption tax for select goods.

This is likely a breath of fresh air for foreign brands, which have had to deal with all sorts of crazy market conditions created by enormous price discrepancies between goods in mainland China and those elsewhere. They’re the reason Chinese tourists and gray-market sellers alike can be seen lining up outside luxury stores across the world, buying up mass quantities of items not just as gifts for friends and family, but also to sell via unregulated online shops on Taobao or WeChat. As this has become a growing trend, luxury sales growth in China slowed to negative 1 percent last year. While the country’s anti-corruption campaign is one source of blame, the other is the fact that Chinese consumers buy around 70 percent of their luxury items either abroad or through the online gray market.

This sketchy daigou ecosystem of online and WeChat sales is a double-edged sword for luxury brands. Alongside sellers on Taobao who actually went to Hong Kong or France to pick up a real Chanel or Hermès purse, there are those selling fakes claiming to be real daigou purchases (complete with a faked receipt to trick buyers). Even the daigou sales of real items are problematic for brands, who have no control over the buyer’s experience or after-sales service.

The issue is no longer just a problem for brands anymore as the Chinese government grapples with slowing domestic retail growth and continued unrest in Hong Kong over parallel traders (smugglers) from the mainland. The gray market trend has only been amplified by the plunging euro, which has caused price discrepancies between the mainland and Europe to widen. Retail sales saw a year-on-year growth rate of 10.2 percent March, which was down from 10.7 percent from January to February. Before the Chinese government’s announcement, luxury brands including Chanel and Cartier had already taken matters into their own hands by slashing prices in the China market.

The Chinese government’s newly planned online regulations won’t do much for domestic daigou sales, since they’re focused mainly on items shipped to China from abroad. The State Council is planning to step up customs inspections of goods shipped from overseas in order to prevent tax evasion.

The tariff-free shopping destination that’s the easiest to reach from the mainland is Hong Kong, which has long been a hotbed for daigou sellers stocking up on everything from baby formula to high-end handbags. This has resulted in violent altercations that have been breaking out this year as locals take their anger out on the flood of mainlanders coming across the border to stock up on tariff-free goods. In order to try to quell the anger, the Chinese government imposed limits on the number of visits to Hong Kong from Shenzhen in mid-April.

The size of the impact that the government’s new regulations will have depends on the amount by which they decide to slash tariffs. While that amount has not yet been released, experts are predicting the sales increase to lead to a modest 0.5 to 1 percent increase in total sales growth. For luxury brands, that means they’re still going to need to develop their own strategies to deal with the complications brought on by high China prices.

 

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